Setting standards

Testimony by experts before the US-China Economic and Security Review Commission in late April underscored China's drive to create homegrown standards in a bid to control the "technological terms of its participation in the global economy", as Pete Suttmeier of the University of Oregon told the Commission. Indeed, a recent People's Daily editorial stated that China faces an "urgent task" to seek a larger role in creating technical standards.

China now has no fewer than seven significant standards initiatives covering just about every mission-critical technical area, including software operating systems, radio frequency identification (RFID), audio and visual processing mechanisms, cellular networks, wireless networks and satellite positioning systems. And so far, the efforts have been an exercise of fits and starts.

The Audio Video Coding Standard (AVS), which seeks to replace the Moving Picture Experts Group (MPEG4) international video chips standard for processing audio and visual content on computers, mobile phones, TV sets and DVD players, is one bright spot, as it appears to be nearing government buy-in, a precursor for being named a national standard, according to state media.

The AVS movement, like China's other standards initiatives, seeks to divorce the country from the costly foreign patent fees. If AVS becomes the national standard, it would save China, which needs 40 million coding and decoding chips annually, at least US$1bn in royalties within 10 years, according to China Daily, citing Gao Wen, head of the AVS working group.

By most indications, AVS stands a good chance of getting broad support because "there seems to be a higher degree of transparency" with AVS than any other standards effort, and "people are hopeful that there's more effort by the Chinese to get more input"? particularly from foreign interests, says Ann Rollins, director of technology and trade policy with the Information Technology Industry Council, a US trade association of high tech companies.

So far, Lenovo, Haier, TCL and Skyworth have expressed interest in the standard, and Gao says multinationals like LSI Logic, Intel China, LG China, Dolby Laboratories and Nokia China have weighed in, adding that AVS, far from being a proprietary standard, is seeking cooperation with MPEG4, according to China Daily.

Although AVS seems to be on course to prevail, not all Chinese standards have met with the same reception.

In the standards game, "it's a question of getting the technology right and getting the players on board," Suttmeier says. That is a rule advocates of the Chinese wireless security standard – known as Wireless Authentication and Privacy Infrastructure (WAPI) – didn't play to.

WAPI's marginalization
At a gathering of high tech executives and engineers in February, WAPI was passed up for consideration by the International Organization for Standardization which opted to review the competing US-led IEEE802.11i standard instead, prompting a walk-out by the Chinese, who blamed a collusion of "international monopoly forces" for WAPI's lock-out, according to the press statement issued by the WAPI delegation reported by China Daily.

But others contend the Chinese WAPI delegates failed to win support partly due to their isolationist stance and inexperience. "They're struggling with competing motivations, one of which is they want to have their standards embraced by the international bodies, yet they're not comfortable with how much those international bodies can be trusted," says ITIC president Rhett Dawson. He also contends China currently lacks the standards infrastructure to support its ambition of becoming a standards setter.

But WAPI had a big strike against it long before the February convention. Last year, China tried to force foreign vendors to comply with the standard in order to sell in its market. The demand spurred protests from foreign interests, led by Intel, which eventually forced China to put its plans on hold.

Strike two came when the Chinese WAPI delegation declined to disclose WAPI's full specs to the ISO, while sharing them with only a handful of Chinese firms. Add to this WAPI's incompatibility with the international standards for wireless local area network products and the net result was nervous foreign vendors facing the prospect of sharing their IP with domestic competitors holding WAPI licenses in order to produce products for the Chinese market. Short of that, the multinational tech vendors can walk away from the US$23.5bn Chinese WLAN market.

Technical barriers
However the WAPI case is viewed, it's clear that the Chinese stipulations were out of reasonable bounds, as "technical barriers to trade" violate the WTO, Suttmeier says. Currently, WAPI is the "biggest headache" in the technical standards arena, says Bill Reinsch, president of the US-based National Foreign Trade Council, who expects WAPI to rear its head at the 16th Sino-US Joint Commission on Commerce and Trade (JCCT) to be held in Beijing this summer.

Still, Suttmeier makes the case that with WAPI, security was a real issue, not just one of the Chinese trying to impose the standard on the multinationals. "In some cases, it's about trying to get these standards suitable to Chinese conditions," he says. "As China matures and becomes technologically complex, there are going to be cases where international standards are not suitable for local conditions," he says.

Suttmeier sees a China whose growing innovations amid an expanding economy will lead to technologies that are less "grafted" to conditions from abroad and more embedded in local culture, tastes, lifestyles and Chinese language. Anne Stevenson Yang, managing director at the US Information Technology Office in Beijing says physical specifications unique to China, such as the wiring in buildings, railroad gauges and earthquake resistance could also necessitate deviations from international standards. Chinese technology experts have sought to justify WAPI on grounds that competing security standards contain serious security holes. "You can argue that," says Paul Lee, author of a Deloitte Touche Tohmatsu report on China's standards initiatives. "There have always been inherent holes in Wifi. [The argument] can be valid, but it can be overblown," he says.

And to be fair, the international standard approval bodies must adapt to changing times. The ISO "must know how important it is for the Chinese to be participate as leaders," while the Chinese "have to have the patience to let the bodies accept [them] not just as participants, but as leaders," according to Dawson.

The Chinese maintain that fewer than 1% of the world's 16,000 international standards have involved their participation.

Pride and patent rent
For China, the stakes of controlling the standards involve more than liberation from the costly royalty regimes. For a country gathering political and economic momentum, it's also about being the master of one's domain and not being beholden to foreign IP. "There's a kind of deep-seated sense of national pride, of wanting to demonstrate its technical prowess," Suttmeier says, referring to this as one manifestation of what he calls China's "techno-nationalism."

But in the end, economics resonate the loudest. "If you create IP, and it's dominant, it's an effective way of generating revenue,"

Dawson agrees: "standards create markets," he says. "If they don't succeed and create markets, they won't be accepted." And in WAPI's case, the Chinese never gave it a fighting chance since various WAPI algorithms were shrouded in secrecy, preventing a meaningful assessment by the international community.

But with its stratospheric market potential, China can afford to play tough. "China is using its market as leverage in the standards war," says Lee. The data bear out China's enviable position: It is the world's the leading DVD manufacturer and the largest cellular mobile market, with more than 300 million subscribers and one of the largest markets for mobile infrastructure; it is the second largest broadband market in the world after the US; the Chinese are expected to buy nearly a third of the world's notebook computers; and China's share of the integrated circuit market is expected to increase from about 14% in 2003 to 23.5 % in 2008, according to Deloitte.

Calculated moves
So far, Lee says China has made some shrewd moves in its standards initiatives, including having picked fast-growing sectors in which to develop its own standards. And although it was a bit late to define the 3G standard, it was better late than never: With its 3G move by way of the TD-SCDMA standard, "it's aiming to get a prominent seat in the development of 4G," Lee says. The Chinese 3G standard has gained traction in the market, with Ericsson recently announcing it would develop technology to support China's TDSCDMA high speed mobile phone networks.

While the Chinese and the technical standards bodies are still trying to reach consensus on WAPI, getting international buy-in is just half the battle. Within China, there are hurdles and factions too, made clear when China's leadership disappointed the WAPI camp last year when it responded to foreign pressure and backed down on mandating WAPI compliance.

Now, the question is, "do the [WAPI contingent] have enough clout to keep it alive?" Suttmeier asks. "There's not necessarily full agreement in China on these things. There were people in the Chinese technical community who were not WAPI supporters. There are differences within research communities and government agencies, and increasingly, you can't assume Chinese companies will march to the same drummer," Suttmeier says.

But equally, it seems foolish to assume a market of China's size will march to foreign drummers forever.

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